Partnership Investment on a duplex using FHA

9 Replies

I’m currently looking to purchase a $220,00 duplex for 3.5% down with a partner. In year 1 I will be living there and renting out the 5 other bedrooms to friends of mine. After year 1 I plan on moving out and renting out all 6 bedrooms as a college rental.

My partner will be in charge of the hands on property management as I will be living a few hours away. If I’m on the loan and my partner is not, but he will be doing the property management, how can we structure an agreement that is fair for both parties and keeps both sides protected?

Any feedback would be much appreciated!!

@Zach Gulbransen FHA loans are used for residential properties up to four units. Anything more is considered commercial which typically is a different loan process that requires at least 20% down. Either way, you can always set up a partnership with an LLC to legally say who gets what. Many residential investors will purchase investment properties in their names and then transfer it into their LLC once the property closes. Commercial deals usually require an LLC.


You're on the right track.  

@Zach Gulbransen From my understanding, you can continue to use it as many times as you like, so long as you refi the initial FHA loan to a conventional loan. The only downside to FHA is that you pay mortgage insurance until you get to 20-25% equity, depending on your lender. This is why more people choose not to utilize, but for new investors looking to house hack, it's a homerun imo.

@Zach Gulbransen There are a couple things to consider... the down payment/equity requirements vary depending on whether or not you live there. I would caution you that when you go to refinance to disclose your intent accurately because it could effect your future purchase. I will add a link to Fannie Mae Guidelines, but here is a quick overview. FHA is only owner occupant financing and it's 3.5% down. Fannie Mae (conv.) is 15% equity on a 2-unit (owner occupied) and 25% equity required to 3-4 units. If you are refinancing it as an investment property it would be 25% equity for 2-4 units. https://singlefamily.fanniemae...

@Zach Gulbransen  Some thoughts for you:

1. Your partner can be on title without being on the mortgage. And you can still run all the income and expense through an LLC and business accounts.

2. Whether FHA or Conventional, you will not be allowed to change vesting to your LLC after closing. And your loan docs will include a "do on sale" or escalation clause about such.

3. You can refi out of the FHA loan into a Conventional loan, so long as LTV is 85% or lower (2 unit) or 97% (1 unit). And if it's above the %, you can bring cash to closing so that the loan is only for % limit of value.

4. Most of the time, you cannot get a second FHA loan while you have one already open. There is an exception for scenarios where the borrower is moving beyond a reasonable commuting distance, but the lender will likely limit the application of the allowance to relocation required for work purposes. I wouldn't use FHA again if it can be avoided though.

5. Although Conventional requires 15% down for a duplex, unlike FHA's 3.5% requirement, Conventional is superior if you can swing it. With Conventional your mortgage insurance can be cancelled without a refi when you hit 80% LTV (unlike FHA), you don't have any upfront MI to worry about (unlike FHA, where you are charged 1.75% of the loan amount; most people finance this), the underwriting standards are a bit less onerous, etc.

6. Conventional will allow for as many as 10 financed properties at once, and if classified as investment (or primary when it's 2-4 units) the lender can count projected rent to help you qualify. Meaning, once you're tapped out on DTI, you don't necessarily have to turn to hard money. You can count 75% of the projected long-term rent on a new purchase to offset most or all of the projected monthly payment that will be added to your DTI. With FHA you can only do this when your buying a primary that's 2-4 units.

7. If your middle credit score, and I'm speaking of the mortgage lending versions of your scores, is 680-700, the overall monthly cost of FHA will be pretty similar to that of Conventional. The rate might be lower, but the MI might make up the difference. If your score is 700+, Conventional will be cheaper overall.

    Originally posted by @Andy Eakes :

    @Zach Gulbransen From my understanding, you can continue to use it as many times as you like, so long as you refi the initial FHA loan to a conventional loan. The only downside to FHA is that you pay mortgage insurance until you get to 20-25% equity, depending on your lender. This is why more people choose not to utilize, but for new investors looking to house hack, it's a homerun imo.

    For FHA mortgages, mortgage insurance is for the life of the loan. It does not matter what the equity is. You have to refinance to conventional to get rid of the MI. There are some exceptions to this, but I rarely see them.